UK Research and Development (R&D) tax relief has been a key part of the Government’s strategy to increase innovation in the UK. On Budget day 2021, the Government launched a wide ranging consultation into the future of R&D tax incentives in the UK - companies making R&D claims will be considering what, if any, changes this could mean for their business. In the context of Brexit and the post-pandemic recovery, this consultation is a signal that a major overhaul of R&D relief in the UK may be coming in 2022.
We carried out a survey to inform BDO’s response to the consultation and there was widespread support for some changes to the current rules – read our Report of the survey results below.
Read our latest survey findings
Although the consultation is wide-ranging some of the key points include:
- A review of the cash back rates for R&D incentives (currently small businesses can claim up to a third of R&D spend back in cash from HMRC, while “large” businesses can claim up to c11%).
- Whether the UK’s two separate R&D tax schemes should be combined.
- The definition of R&D for tax relief purposes.
The Government has set itself a target of raising total UK investment in R&D to 2.4% of GDP by 2027, so boosting R&D investment is a key objective stated in the consultation. As R&D tax relief is seen as one of the biggest drivers of R&D investment in the UK, further objectives are to ensure that the relief remains relevant, competitive and well-targeted. HMRC’s comprehensive consultation seeks views from stakeholders on a number of fundamental aspects of the R&D schemes and where there may be improved.
Staying internationally competitive
Many countries around the world offer similar R&D tax incentives, all with varying levels of benefit and costs that can be claimed (see BDO’s comparison of European regimes). However, the UK is unusual in that it has separate schemes, with one for Small or Medium Enterprises (SME) and one for “large” companies which claim under the R&D expenditure credit (RDEC) scheme. The scheme available to a business depends on both its size, the nature of work undertaken, and other funding receipts. The SME scheme allows for an additional tax deduction of 130% of qualifying costs which can trigger tax credits up to 33% of qualifying costs. Under the RDEC scheme companies are able to claim an above the line tax credit based on qualifying costs, resulting in a net cash benefit of just under 11%. Many other countries tend to take a one size fits all approach, often offering larger credits than the UK RDEC.
The consultation seeks to understand whether the SME and RDECs schemes should be merged, which could result in a standard relief percentage for all companies irrespective of size. Clearly, this would reduce the complexities associated with having two schemes and it would benefit large companies if the new standard rate of relief was increased to stay internationally competitive. However, respondents to our survey were split on the idea of merging the schemes (with 56.6% against) and we suspect that they are concerned that the rate relief under a combined scheme would be less than is currently available via SME scheme.
Redefining and targeting R&D
Another key area covered by the consultation is whether the current definition of R&D (which has seen few changes since the scheme was introduced in 2000) is still fit for purpose. HMRC is seeking views on what other activities should fall within the definition of R&D used in the future and whether new classes of costs, such as cloud computing and even capital assets, should be eligible for relief.
As much UK R&D activity is carried out in the south east of England, the Government is also interested in how the current reliefs affect R&D carried out in different parts of the UK – with a clear inference that it may consider using differential rates of relief aiming to ‘level up’ R&D investment across the UK. Interestingly, a clear majority (79.1%) of respondents to our survey were against the creation of regional R&D rates.
The consultation also asks for views on whether R&D relief could and should be used to promote social value, for example the development of green technology and to discourage R&D in certain fields – this is a much more popular proposal with 72.9% of respondents to our survey supporting the idea.
We will provide further analysis when the government responds to the consultation findings so please bookmark this page for updates.